Is Zero-Based Budgeting Right for You?

Whether you’re married or single, working part-time, full-time or running your own business – preparing and stick to a budget is crucial to your financial health. But if you’re like most people, the thought of preparing a monthly budget doesn’t elicit much enthusiasm or excitement. In fact, most of us could probably think of a thousand things we’d rather do than relive our spending decisions from the previous month and decide what fun activities we’ll have to cut out from our budget for the next month.

Let’s face it: budgeting isn’t anyone’s idea of a good time. It’s tedious and time consuming. It forces us to confront our financial habits and acknowledge that there are certain things we’ll have to live without. For many of us, budgeting is a monthly reminder that we can’t have everything we want.

But the fact remains, budgeting serves two important purposes: (1) You can make a plan to ensure that you don’t spend more than you bring in; and (2) you can ensure that you’re saving enough each month.

Maybe you’ve heard of some of these approaches. Of course, there’s no one-size-fits-all solution to budgeting. So, if you’ve found something that works for you – stick with it! But if you’re still looking for the right method, I want to introduce you to something that might make sense for you – Zero-Based Budgeting.

What is Zero-Based Budgeting?

You might’ve heard it referred to as the “envelope system” or “zero-sum budgeting.” Whatever you call, the premise is simple: create a budget where every dollar has a job!

(and stick to it!)

This method puts you in total control over your money so you can make every dollar work for you!

Let’s say your monthly income is $3,000. In that case, you’ll want to determine where every dollar goes, so you’re left with zero dollars at the end of the month. To accomplish this, you’ll want to assign each dollar a job; no dollar is left without a purpose. Giving every dollar an assignment eliminates any uncertainty about where your money is going or how much you should be saving.

Still not making complete sense? Let’s dig into the nitty-gritty so you can see how it works.

How It Works

1. What’s Your Monthly Income?

With this method, you’ll create a new budget each month. That makes determining your monthly income a logical starting point. It shouldn’t be difficult. You should list everything from your regular paychecks, to side hustle income, to that cash grandma slips into your birthday card each year.

2. What are Your Monthly Expenses?

Monthly expenses aren’t difficult to calculate either. The important thing is that your budget reflects your actual expenses for each month. Don’t get lazy! If you only pay your car insurance every six months, that line item should only appear in your budget twice a year. Exclude it from your budget every other month.

Also, keep in mind, your “expenses” aren’t limited to just bills and spending. Be sure to include monthly saving and investing goals too!

3. Getting to Zero

You shouldn’t have any money left over in your budget. There’s no miscellaneous category or cash reserves. If you don’t have enough cash to cover your expenses, then you’ll either need to generate more income or slash your expenses. If you still have money left over after you’ve covered all of your bills and expenses, guess what — those excess funds are perfect for paying down debt, saving, or investing!

Putting It Into Action

Now, let’s bring it all together. Suppose your monthly take-home pay is $3,000 (i.e., that’s what you have left after accounting for taxes, health insurance, and any other withholding or contributions taken from your paycheck).

That means you have 3,000 one-dollar bills that are each awaiting an assignment.

Your zero-based budget could look something like this:

Rent – $1,000

Utilities – $300

Cable and Internet – $150

Auto Insurance – $150

Car Payment – $300

Gas – $100

Groceries – $300

Savings – $500

Food, Entertainment and Fun! – $200

With this budget, you know that you’ll be able to pay all your bills, have some fun money, and still be able to set aside some savings!

Again, notice how there isn’t a “miscellaneous” category in there. That’s because you’ve account for every dollar and decided where your money needs to go ahead of time!

What about money for emergencies? There’s no way you can anticipate when emergency expenses will pop up or how much they’ll cost you, right? True, but that’s exactly why they aren’t part of your budget.

Advantages of a Zero-Based Budget

For risk-takers or those looking for creative ways to manage their money, zero-based budgeting may actually have more advantages that you’d expect.

Better Control Over Spending

Zero-based budgeting is great because it allows you to control spending more effectively. This budgeting style has a built-in accountability feature because your spending is predetermined. All you need to do is compare your spending to your budget to know if you’ve succeeded. This approach can also challenge you to find more creative ways to accomplish your financial goals and do more with less!

Align Your Goals with Your Financial Resources

Because your budget should focus on actual bills, your specific needs, and meaningful personalized goals, you’ll be better positioned to avoid unnecessary expenses. This will also help you resist urges to spend carelessly or impulsively. Plus, you get a fresh start each month. That’s the perfect opportunity to review your spending habits and decide if you need to make any adjustments in order to hit your goals.

Disadvantages of a Zero-Based Budget

Now that we’ve covered some of the advantages of zero-based budgeting, let’s take a look at some of the drawbacks.

Time-Consuming

The biggest drawback, in my opinion, is that zero-based budgeting can be very time-consuming. Since every month starts anew with a fresh budget, and expenses that can vary from month to month, you’ll need to take time to determine exactly what belongs in each month’s budget. As you might imagine, this becomes even more tedious if you’re budgeting with a spouse or partner.

Biased Toward Short-Term Goals

Because zero-based budgeting is so focused on one-month periods, it tends to downplay the role longer-term goals play in your finances. If you’re focused on accomplishing things in 30-day periods, then zero-based budgeting will work great for you! But you might encounter some challenges finding ways to incorporate longer-term goals into your budget.

Difficult for Individuals with Irregular Income

Creating a zero-based budget is much easier if you have steady, regular income. However, if your income or cash flow is a bit irregular – tips, commissions, self-employment – the system becomes a little more difficult to implement.

Is Zero-Based Budgeting Right for You?

Zero-based budgeting is ideal for those who want to take control over their money and analyze their finances on a monthly basis. This method tends to work well for individuals who are paying off consumer debt or student loans. Zero-based budgeting creates a one-month-at-a-time plan that helps those individuals gradually move closer to becoming debt free.

If you’re at a stage in your financial life where you’ve paid off your student loans and are now focused on building long-term investments, a zer0-based budget will probably seem like overkill. In that case, a traditional budgeting system might be a better option for you.

No matter what system you use, what matters most is that you’re in tune with your finances and know where your money is going!

So, where do you fit in? Do you think zero-based budgeting makes sense for you?

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2 Comments

I am a bit of a hybrid on this one. We have our categories and give every dollar a spot in the budget but the one catch is we will usually have some where between $75-$150 that keep in our “miscellaneous” category because there are just things that come up unexpectedly through the month.

So we plan on something unexpected happening and give that its own category. Sometimes it does happen and other times it doesn’t, but we prepare for it up front.

That makes sense. Lots of different ways to manage spending and saving. The important thing is not to spend more than you make and to have enough set aside so that life emergencies don’t become catastrophic financial emergencies. Sounds like you’ve found a method that accomplishes all of those things!